The cost of cutting US aid to Egypt

The delivery of F16 jets to Egypt has been delayed, but long-running contracts hinder Obama's ability to turn aid off all at once

The Obama administration says it is continuing to review its military aid to Egypt, infuriating those calling for an immediate cut in assistance that would send a strong signal to Egypt's army chief, General Abdel Fattah al-Sisi.

The White House's slow and deliberate approach is not only driven by a debate over national security concerns but also partly by the cost and impact the move could have on defence contracts and jobs at home.

A decision is likely within the next 10 days.

Washington's military relationship with Egypt runs deep and is tied up in complicated financing mechanisms and long-running contracts.

"Providing foreign assistance is not like a spigot," said White House deputy spokesperson Josh Earnest on Tuesday.

"You don't turn it off and on or turn it up and down like a faucet. Assistance is provided episodically."

In addition, most of the $1.3bn (£834m) in military aid to Egypt for the fiscal year has already been allocated or spent. Before the coup, the Obama administration had requested $1.3bn in military aid for 2014, which Congress will debate after the summer recess.

The White House put all military aid to Egypt currently in the pipeline under review soon after the overthrow of President Mohammed Morsi.

They are sifting through what has been ordered and what paid for, which deliveries can be delayed, and what payments can be deferred without incurring penalties. This would allow the White House to partially suspend aid, in a way that could be reversed further down the line if needed.

The White House has already postponed indefinitely the delivery of four F16 jets, bought by Egypt as part of a 20-jet programme signed in 2010 and due to be sent this month. Eight were delivered earlier this year, and another eight are due later this year.

The US is also expected to deliver 10 Apache helicopters this month, which were ordered in 2010, and 125 tank kits for M1A1 Abrams tanks which Egypt assembles locally. These deliveries could now be suspended.

Guns on credit

Orders of tanks bound for Egypt are bolstering some American firms as the US Army trims its own orders

The US started providing military aid to Egypt in the early 1980s, after Egypt and Israel signed a peace agreement. Egypt was keen to use the aid to rapidly modernise its army and replace old Soviet equipment bought in the '60s and '70s, when Cairo was an ally of the Soviet Union.

The US had provided limited economic aid to Egypt in the late '70s, and Cairo had bought some military hardware with cash.

But after the Camp David accords, Egypt became eligible for Foreign Military Funding (FMF) credit to buy American military equipment.

Weapon systems, just like cars, are bought on credit. Most countries receiving FMF aid are required to show they have the funds to cover the full cost of the order, and the value of their orders cannot exceed the credit extended by the US.

But Egypt was offered a credit arrangement more generous than most: In essence, the US gave Egypt a credit card with no limit and promised to pay the bill when it came due with US taxpayer money.

Egypt was allowed to submit large orders for equipment that takes years to produce in amounts worth far more than what Congress had appropriated in military aid for Egypt, often before it had even been appropriated.

As far back as 1982, the Government Accountability Office, an independent watchdog agency, was raising concerns about the system.

In a report entitled Forging a New Defense Relationship with Egypt, the comptroller general of the US warned Egypt had already placed orders worth $3.5bn, even though US FMF credit available to Egypt through the end of that fiscal year totalled only $2.05bn.

Today the gap between the cost of Egypt's orders over the last few years and the money Congress has appropriated for Egypt military aid runs several billion dollars.

And about $4bn in military hardware ordered by Egypt has yet to be delivered.

The 1982 report said the easy credit arrangement had Egypt believing that US money was guaranteed to flow year after year, and warned of contractual and financial consequences for the US.

The GAO report went unheeded by the US Congress and the state and defence departments, in part because the military aid to Egypt was also a boost for the US economy at the time - and remains so today.

Penalties and jobs

US taxpayer money for Egypt's military shopping is deposited in an account at the Federal Reserve Bank of New York, from which it is used to pay the weapons manufacturers.

General Dynamics is a big employer, and a very good employerEd Fairbrother, Archbald, Pennsylvania mayor

Therefore, any cuts to Egyptian military aid risk the US government breaking existing contracts with American arms manufacturers.

Some of the orders currently underway are for military hardware due for delivery in 2018. Any penalties for breaking existing contracts would have to paid by the US government and borne by the American taxpayer. Estimates vary about the cost of the penalties, but they could run up to several billion dollars.

Among the military equipment Egypt orders from the US are M1A1 Abrams tanks, which have been at the centre of budget battles in the US itself.

In the midst of budget cuts, the army planned to stop buying the tanks until 2017, when production of a new line begins. But members of Congress keep approving federal funding for more tanks to protect businesses and jobs in their home districts.

In November 2011, General Dynamics in Virginia won a $395m contract for work under the Egyptian tank co-production programme. The contract funds the co-production of 125 Abrams tank kits, which are shipped to Egypt for assembly.

Components for the Abrams tanks are built in factories in Alabama, Florida, Michigan, Ohio and Pennsylvania.

Mayor David Berger of Lima, Ohio, told the BBC his town hoped foreign sales of military hardware would make up for the decline in US Army purchases of Abrams tanks.

The Ohio plant produces turrets for the tanks, and Mayor Berger estimated several dozen employees would be directly affected by any decision to cut aid to Egypt.

In other towns, many more jobs are directly connected to production of military equipment sent to Egypt. In Pennsylvania, an estimated 44 companies are involved in the co-production of the Abrams tank.

In the small town of Archbald, Pennsylvania, a General Dynamics plant manufactures the suspension for the M1A1. About 130 people work in the factory. In a town of around 7,000, the impact of stopping any production would be felt instantly.

"General Dynamics is a big employer, and a very good employer," said the town's mayor, Ed Fairbrother.

Mr Fairbrother said production at the General Dynamics plant had already been affected by a general slow-down in defence contracts and across-the-board budget cuts - 60 people were laid off in 2012.

The town is also home to a missiles and fire Lockheed Martin plant.

Lockheed Martin, one of the largest defence contractors in the world, was awarded the $213m contract for F16s for Egypt in 2010.